U.S. economy retail spending/ wealthier Americans spending/ affluent consumers economy/ economic growth driven by wealth/ retail sales increase 2024/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ Wealthier Americans, benefiting from strong gains in income, home equity, and stock market wealth, are driving U.S. retail spending. While lower-income households struggle with higher living costs, affluent consumers are sustaining economic growth. This spending pattern is helping keep the economy on solid footing despite ongoing inflationary pressures.
Affluent Consumers Quick Looks
- Wealthy Consumers Driving Growth: Higher-income Americans are leading the surge in retail and restaurant spending, buoyed by rising wealth in housing and stocks.
- Spending Gap: Lower-income households, facing higher costs for essentials like rent and groceries, have cut back on discretionary spending.
- Stock Market & Housing Gains: Affluent households have seen a significant increase in home equity and stock market wealth since the pandemic, fueling more spending.
- Retail Sales Boost: U.S. retail sales rose by 0.4% in September 2024, with a notable 1% increase in restaurant sales.
- Economic Resilience: Despite inflation and higher interest rates, consumer spending remains strong, aiding overall economic growth.
Wealthier Americans Fuel U.S. Economy Amid Rising Retail Spending
Deep Look
In a trend that has surprised many, wealthier Americans are powering the U.S. economy through sustained retail spending, even as lower-income households face financial pressures from rising costs. This shift in spending patterns, confirmed by research from the Federal Reserve, indicates that affluent consumers have taken on a larger role in driving economic growth, a significant development as the country navigates inflation and higher interest rates.
Affluent households, buoyed by substantial gains in income, housing values, and stock market investments, have increased their spending on retail goods, dining, and entertainment. This shift contrasts sharply with the pre-pandemic period when spending patterns across income groups were more evenly distributed. As the U.S. economy continues to grow, consumer spending, which accounts for roughly 70% of economic activity, remains a key engine of growth — thanks largely to wealthier Americans.
While affluent households have ramped up their spending, lower-income Americans have been disproportionately affected by rising prices for essentials such as rent, groceries, and utilities. For many, this has left little room for discretionary spending on items like electronics, travel, and dining out. Though inflation-adjusted incomes are starting to recover, many lower-income households may take years to rebuild their financial stability.
A Tale of Two Economies
The disparity in spending between wealthier and lower-income households helps explain a puzzling gap in the U.S. economy. Despite widespread pessimism reflected in consumer sentiment surveys, official economic data paints a picture of robust growth. The Federal Reserve’s interest rate hikes, intended to control inflation, have increased borrowing costs for mortgages, auto loans, and credit cards, but have not significantly dampened consumer spending among higher-income groups.
In 2022, inflation-adjusted consumer spending increased by 3%, followed by a 2.5% rise in 2023. The government reported a 2.8% annualized increase in the April-June quarter of 2024, while the Commerce Department noted that retail sales rose 0.4% from August to September 2024. Restaurant sales, in particular, saw a notable 1% rise, suggesting that many Americans, particularly the affluent, still feel confident enough to spend on meals outside the home.
“The ongoing strength of wealthier Americans is still carrying overall spending,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. He pointed to the significant increase in housing and stock market wealth, particularly for the richest Americans, as a key factor driving the surge in spending.
Wealth Gains Fuel Spending
The wealthiest households in America have seen dramatic increases in their assets over the past four years. The Federal Reserve reports that the top 10% of U.S. households, who own about 80% of stock market value, have experienced significant gains in both home equity and stock market wealth. Since the pandemic, home equity among the wealthiest one-tenth of Americans has surged by 70%, reaching $17.6 trillion by mid-2024. Their wealth in stocks and mutual funds has jumped by 86%, now totaling just under $37 trillion.
This sharp increase in wealth has lessened the need for high-income consumers to save from their paychecks, allowing them to spend more freely. A report from Federal Reserve economists noted that, before the pandemic, retail spending across all income groups rose at roughly the same pace. However, this trend shifted around three years ago, with upper- and middle-income households significantly outpacing lower-income consumers in their spending growth.
By August 2024, inflation-adjusted retail spending had climbed 17% for households earning more than $100,000 since January 2018. For middle-income households (earning between $60,000 and $100,000), spending rose by 13.3%. In stark contrast, households earning less than $60,000 saw a spending increase of just 7.9% over the same period, with spending among lower-income groups declining between mid-2021 and mid-2023.
Lower-Income Struggles
For many lower-income Americans, the rising cost of living has sharply reduced their ability to spend on non-essential items. Inflation has disproportionately affected this group, forcing them to allocate a greater share of their income to necessities such as housing and food. As a result, the lowest-income fifth of U.S. households, defined as those earning less than $28,000 annually, reduced their discretionary spending by 2.5 percentage points as of mid-2024 compared to 2019. Similar reductions were observed for middle-income and lower-middle-income households, while wealthier households increased their spending on discretionary items.
Helaine Rapkin, a 69-year-old teacher shopping at a Kohl’s in New Jersey, expressed frustration over the rising costs. “I am not feeling good at all,” Rapkin said. “I can’t believe how expensive things have gotten…Clothes or food.” Her experience echoes that of many lower- and middle-income Americans who feel the pinch despite a slower rate of inflation.
The struggle of lower-income households is also reflected in rising levels of debt. The proportion of borrowers who are behind on credit card and auto loan payments has reached its highest level in a decade, signaling growing financial stress among consumers. Even so, economists such as Karen Dynan, a Harvard professor, argue that these challenges are unlikely to derail the broader economy. “There are increasing cracks in consumers’ spending,” Dynan noted, “but it’s not yet a broader economic story.”
A Brighter Outlook Ahead?
Looking forward, experts remain cautiously optimistic. As inflation continues to ease and real incomes gradually rise, many believe that consumers — including lower-income groups — will regain some of their lost purchasing power. Michael Pearce of Oxford Economics suggests that the worst of the inflationary pressures may be behind us. “We’re probably past the worst,” Pearce said, referring to the intense strain on spending from inflation and higher interest rates. “Now, I think the outlook is pretty strong.”
With higher-income Americans continuing to lead the charge in retail spending, and inflation-adjusted incomes on the rise for lower-income groups, the U.S. economy may maintain its momentum in the months ahead.
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